Question

1. Hamza Inc. acquired all of the outstanding common stock of Ali Corp. on January 1, 2016, for $372,000. Equipment with a ten-year life was undervalued on Ali's financial records by $46,000. Hamza also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years.

   Ali Co. earned reported net income of $180,000 in 2016 and $216,000 in 2017.  Dividends of $70,000 were paid in each of these two years.  Selected account balances as of December 31, 2018, for the two companies follow.

   	Hamza Co	Ali Co
   Revenues	$1,080,000	$840,000
   Expenses	480,000	600,000
   Investment income	Not given	0
   Retained earnings, 1/1/18	840,000	600,000
   Dividends paid	132,000	70,000

   17.  If the partial equity method had been applied, what was 2018 consolidated net income?

   		$768,400.
   		$840,000.
   		$240,000.
   		$822,000.
   		$600,000.

Answer 1

In Partial equity method, investor records its proportionate share of income/loss in investee as single line adjustment and records no other adjustments e.g. amortization of unrecorded assets etc.

Hence, undervaluation of equipment or amortization of customer list shall have no impact in consolidated PL.

	Income / expenses	Hamza Co.
	Revenue	1,080,000
	Investment income	-
	Total income	1,080,000
	Expenses	480,000
	Total expenses	480,000
	Total income	600,000
	Add: Income from Partial equity	240,000
	Total consolidated income	840,000
	Note:
1	Income statement of Ali Co.-
	Revenue	840,000
	Investment income	-
	Total income	840,000
	Expenses	600,000
	Additional expenses
	Total expenses	600,000
	Total income	240,000